Inflation is pressing down hard on consumer packaged goods (CPG) companies and their customers. If you manage sales for a CPG company, that pain is especially harsh. Rising costs are forcing your company to hike prices but striking that optimal price point—one that secures long-term profit without turning away customers—may feel impossible.
However, there are nuances to setting pricing during inflationary environments that not all CPG companies know about. In this article, we lay out the proven ways to form a successful CPG pricing strategy during inflation.
Why do you need a new pricing strategy during inflation?
Inflation is streaking to historic highs. According to Trading Economics, annual inflation hit 9.1 percent in June, marking the highest point in more than 40 years. Unfortunately for CPG companies, inflation is springing out of several factors that are piling on all at once, including:
- Supply chain bottlenecks
- Staffing shortages
- New consumer demand patterns
- Commodity cost increases
Every moment inflation beats down on the company, there’s a stronger need to deflect costs with more accurate pricing. With so much financial pressure building for CPG companies, it’s not a matter of if you’ll need to raise prices but when, how often, and by how much.
Traditional price elasticity analysis isn’t enough.
In the past, you may have used traditional price elasticity analysis to identify price points at your CPG company. However, traditional price elasticity analysis isn’t equipped to support a successful pricing strategy during the current inflation crisis. Here are a few reasons why:
Shopping patterns have been disrupted.
COVID-19 upended the way consumers shop and buy products. That means much of the historical data that traditional price elasticity analysis would tap into simply doesn’t reflect modern shopping patterns.
Price variation is missing.
With inflation, supply chain disruptions, labor shortages, and more popping up all at once, price hikes are urgent. That sudden upswing in prices means there isn’t enough variation in pricing to determine meaningful price elasticity. Adding to the confusion is the growing list of variables, such as market shocks, distribution, marketing, trade promotion, and other factors, that make it impossible to predict pricing on your own.
Inflation is hitting historic peaks.
Inflation is hitting levels that are unfamiliar to even the most seasoned CPG leaders. That means new prices rise beyond any previous prices in the marketplace. As prices enter uncharted waters, it can be impossible to find historical pricing data that fits the modern market.
How do you build a winning CPG pricing strategy during inflation?
Currently, inflation is bearing down on companies in an environment that’s completely new to most manufacturers. Still, there are ways to gain a pricing edge without damaging sales. Here’s how to build an efficient pricing strategy during inflation:
1. Gather data with virtual shopping research.
Virtual shopping with Decision Insight is ideal for testing pricing because it puts shoppers in the context of an actual purchasing decision using an online retail environment. In this exercise, consumers “shop” the category as they would in real life – selecting products from the shelf to view a larger image with product details and choosing which (if any) items to add to their shopping cart. Because Decision Insight’s virtual aisle replicates the actual product assortment and arrangement in the context of the retail store, the virtual sales data correlates to in-market data at a very high level of .90 or higher. There are clear advantages to using virtual shopping to drive your company’s pricing strategy, including:
- It is reflective of the current market
- In an online virtual shopping test, consumers make decisions within the context of a realistic retail environment. That means it measures current behaviors in reaction to the scenarios being tested—reflecting real choices, even if a major event such as the pandemic, economic fluctuations, changing customer attitudes, or other factors in the market that may impact the way people shop.
- It accurately pinpoints consumer behaviors
- Virtual shopping reflects real-world shopping behaviors extremely accurately. The high level of confidence from the proven correlations to in-market data provides the foundation for Price Predictor™, developed to optimize pricing.
- It tests competitive response
- The pricing of competitors can also be varied in the virtual shopping test to replicate realistic reactions in the market. This provides an understanding of how shoppers react to your brand’s price shifts as well as competitors, to optimize strategy with confidence.
2. Predict and test prices with machine learning.
Machine learning is another tool that makes it easy to identify optimal pricing during inflation. This level of advanced analytics can explore multiple variables in different scenarios.
Machine learning can account for growing brand variation and make predictions based on market conditions. It can also adjust when new market events take hold, and you can update your analysis quickly and regularly.
3. Use ShopperIQ® - Price Predictor™ to set new pricing strategies.
Price Predictor removes the guesswork from price adjustments because it generates fresh pricing data that fits the current market. It also allows your company to test competitive response to price changes even if prices rise beyond historic trends.
Learn the secrets to mastering inflation pricing strategies.
Inflation has already hit consumers and CPG companies hard. If you haven’t taken price already, it’s only a matter of time before you’ll need to consider it—and manage the tough pricing decisions that they carry. However, by following a few best practices, you’ll have the knowledge to price effectively and secure a competitive advantage.
Interested in learning more ways to improve your pricing strategy amid historic inflation? Watch our webinar, “Inflation’s Impact on CPGs”, for our approach to pricing in the modern economic climate.
